CHINA BAOLI TECHNOLOGIES HOLDINGS LTD (formerly known as REX GLOBAL ENTERTAINMENT HOLDINGS LTD) v. ORIENT EQUAL INTERNATIONAL GROUP LTD AND OTHERS

CACV 34/2018

[2021] HKCA 1609

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 34 OF 2018

(ON APPEAL FROM HCA 1399/2016)

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DECISION ON COSTS

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Hon Barma JA (giving the Decision on Costs of the Court):

1.  This is our decision on costs in relation to the appeal by the 3^rd Third Party (“SVK”) against the decision of DHCJ Le Pichon (“the judge”) dated 12 June 2017 whereby the judge dismissed SVK’s Summons dated 29 March 2017 to set aside the ex parte leave granted to the defendants to serve the Third Party Notice in these proceedings on SVK out of the jurisdiction.

2.  As explained below, the substantive hearing of the Appeal was vacated by a consent order made by this court on 9 October 2018, which also directed the parties to make written submissions on costs.  Having considered the parties’ respective submissions, we now give our decision on costs, with apologies for the delay in doing so.

Background

3.  The background to the action has been set out in detail in [2] to [32] of the judge’s decision.  We propose to briefly set out the circumstances leading to the withdrawal of the Third Party Notice and the vacating of the appeal hearing, which are the pertinent matters for present purposes.

4.  The action (HCA 1399/2016) was brought by the plaintiff against the defendants to enforce lock-up undertakings given by the latter in respect of shares in the plaintiff allotted to the defendants under a placement exercise.  The undertakings prohibited any sale or dealings with the shares for a period of 24 months from the date of allotment (26 April 2016) – ie until 26 April 2018.

5.  On 6 May 2016, shortly after the allotment of the shares, the defendants pledged the shares as security for certain loans from the 1^st and 2^nd Third Parties (“the lenders”).  As part of the loan facilities and share pledge arrangements, the parties entered into three control agreements with SVK, a brokerage firm based in the United Kingdom.  It was agreed under the control agreements that, inter alia, SVK would only comply with notifications originating from the lenders without further consent of the defendants.  Each of the control agreements contained an exclusive jurisdiction clause (in favour of the courts of New York) governing disputes arising out of or relating to the control agreements.

6.  The defendants claim that they entered into the loan transactions pursuant to fraudulent misrepresentations by a Mr Wang, who was said to be the agent of the lenders, and that they thought that the shares could not be sold by the lenders without first notifying the defendants.  The defendants maintain that the loan transactions were induced by such fraudulent misrepresentations and were thus void.

7.  In late May 2016, the plaintiff noticed an unusual spike in the trading volume of its shares.  The plaintiff’s enquiries led to the discovery of the loan and pledging arrangements between the defendants and the lenders.  The plaintiff considered such arrangements to be a breach of the lock-up undertakings, and applied for and obtained an ex parte injunction against the defendants on 27 May 2016 to restrain any further breach of the lock up undertakings (“the lock up injunction”).  The lock up injunction was, by an order dated 3 June 2016, continued until trial or further order.

8.  Thereafter, on 18 July 2016, the defendants issued third party proceedings against the lenders and SVK and took out a summons for an injunction to restrain the lenders and SVK from disposing of or dealing with the Shares (“the defendants’ injunction summons”).

9.  On 27 July 2016, the defendants obtained leave from L Chan J to serve the Third Party Notice out of the jurisdiction on the lenders and SVK.

10.  On 29 March 2017, SVK issued a summons seeking to set aside the ex parte leave that had been granted to serve the Third Party Notice on SVK.  By her decision, the judge dismissed SVK’s setting-aside application.

11.  SVK’s application for leave to appeal was refused by the judge on 10 November 2017. Upon SVK’s renewed application to this court, leave to appeal was granted on 26 January 2018.

12.  On 9 February 2018, SVK filed its Notice of Appeal pursuant to such leave. Thereafter, the appeal was fixed to be heard on 26 October 2018.  In the Notice of Appeal, the grounds of appeal included a ground based on a choice of jurisdiction clause under the agreements with SVK in favour of the New York courts.  It was said that under the doctrine of separability, save in limited circumstances (such as forgery or total lack of authority on the part of an agent) a choice of forum clause should be regarded as separate from the substantive agreement of which it formed a part, such that defects (such as misrepresentation) directed against the validity of the main agreement would not affect the validity of the forum clause.  A further ground of appeal relied on by SVK related to the lack of a serious issue to be tried under the third party proceedings, and that it was not open to the defendants to seek to uphold the grant of leave to serve out obtained on an ex parte basis in reliance on matters not put forward at the ex parte stage.  A final ground related to the interim injunction against SVK by which it was contended that if either of the preceding grounds succeeded, the interim injunction would fall away as the court would then have no jurisdiction over SVK.

13.  Given that the lock up injunction only restrained the defendants from breaching the lock up undertakings, which expired on 26 April 2018, the plaintiff and the defendants, through their solicitors, agreed in late April 2018 that the lock up injunction had lapsed upon the expiry of the lock up period.  The parties simply treated the injunction as spent, and did not take any formal steps to discharge the lock up injunction.

14.  On 19 September 2018, just over one month before the appeal was due to be heard, the defendants took out a summons in this appeal to vacate the hearing, on the purported basis that the substantive issues between the defendants and the lenders and SVK had become academic.

15.  By a further summons dated 24 September 2018 (in HCA 1399/2016), the defendants sought leave to withdraw the Third Party Notice against SVK for the same reasons.  Leave to do so was granted by Master J Wong on 5 October 2018, on the basis of a consent summons jointly filed by the solicitors for the defendants and SVK the previous day.

16.  In those circumstances, the defendants and SVK agreed that the appeal had become academic (at latest on the grant of leave to withdraw the third party proceedings against SVK) and that the hearing of the appeal should be vacated, with the outstanding issue of costs to be disposed of on paper.

The principles

17.  It is, of course, trite that costs and the basis of taxation are in the discretion of the court.  Generally speaking, upon an application for leave to discontinue, the discontinuing party will be required to pay the costs of the other party, unless exceptional circumstances can be shown to justify a different order.  The fact that the discontinuance was caused by the issues becoming academic does not of itself justify departure from this starting point as a matter of discretion: Anmol Kumar Sawlani v Yeshma Gobindram Sawlani (unreported, HCA 2231/2011, 9 May 2013, [10]-[15], per Recorder Shieh SC).

18.  Mr Keith Lam, appearing for SVK, drew the following considerations to our attention:

(1)  It has been said that the starting point above may be departed from where the withdrawing/discontinuing party can show, for example, that the proceedings have become academic: Trend Publishing (HK) Ltd v Vivien Chan & Co (a firm) [1996] 2 HKLR 227, at 230H-J, per Keith J.

(2)  If the withdrawal/discontinuation was due to something done by the defendant, after the issuance of proceedings, which rendered it unnecessary or academic for the plaintiff to proceed with the proceedings, this may justify awarding costs to the plaintiff: Re Peaktop Technologies (USA) Hong Kong Ltd [2007] 4 HKLRD 207, [8], per Barma J (as he then was).

(3)  One may also depart from the starting point where the withdrawing/discontinuing party shows that he will succeed on the substantive issue: Re Fook Lam Moon Restaurant Ltd (unreported, HCMP 438/2010, 8 December 2015), [40], per To J.  How far the court will be prepared to look into the substantive issues will depend on the circumstances of each case, such as the amount of costs at stake, the conduct of the parties, and whether evidence needs to be adduced.  The court may take a broad brush approach on the basis of the available materials: Re Fook Lam Moon (supra), [41], [45]. [50].

(4)  Specifically, where a pending appeal becomes aborted:

(a)   Where the reason was because the respondent did something which rendered the underlying dispute moot, the starting point is also that the appellant is entitled to the costs of the appeal: Harripaul v Lewisham LBC [2012] HLR 24, [9]-[10], per Rimmer LJ.

(b)   As for any costs order of the proceedings below that were already made, the Court of Appeal has jurisdiction to make any costs order as it thinks appropriate, including reversing the costs order below: Safeway Stores Ltd v Twigger [2011] 2 All ER 841, [33], [40], [55]-[56], [59].

(c)   Although Safeway Stores was based on the provisions in CPR 38.6 which differ from those under O.21, r.3, Mr Lam submitted that the reasoning reflects what should be the starting point in the court’s exercise of its costs discretion.

19.  Mr Barrie Barlow SC (leading Mr Justin Lam), who appeared for the defendants, on the other hand, relied on the following passages from R v Liverpool City Council ex p Newman [1993] COD 65 at page 2 (mainly in relation to the defendants’ “alternative costs proposal”, which will be discussed further below):

“The only authority put before me is a short report in The Independent of 8^th December 1988 of Henry J’s judgment in Barretts & Baird (Wholesale) Ltd and Others v The Institution of Professional Civil Servants and others. Henry J there referred to the general rule concerning discontinuance noted in the Supreme Court Practice that in the ordinary way defendants would recover their costs on such discontinuance. He held however:

‘…that the general rule should only apply when the discontinuance could safely be equated with defeat or an acknowledgement of likely defeat.’…

The position is, however, entirely different where, as here, the discontinuance follows some step which has rendered the challenge no longer necessary, which in other words renders the proceedings academic. That may have been brought about for a number of reasons. If, for instance, it has been brought about because the respondent, recognizing the high likelihood of the challenge against him succeeding, has pre-empted his failure in the proceedings by doing that which the challenge is designed to achieve – even if perhaps no more than agreeing to take a fresh decision – it may well be just that he should not merely fail to recover his own costs but indeed pay the applicant’s.

On the other hand, it may be that the challenge has become academic merely through the respondent sensibly deciding to short-circuit the proceedings, to avoid their expense or inconvenience or uncertainty without in any way accepting the likelihood of their succeeding against him.  He should not be deterred from such a cause by the thought that he would then be liable for the applicant’s costs.  Rather in those circumstances, it would seem to me appropriate that the costs should lie where they fall and there should accordingly be no order.  That might equally be the case if some action wholly independent of the parties had rendered the outcome of the challenge academic.  It would seldom be the case that on discontinuance this court would think it necessary or appropriate to investigate in depth the substantive merits of what had by then become an academic challenge.  That ordinarily would be a gross misuse of this court’s time and further burden its already over-full list.”

20.  It must, however, be noted that that the correctness of the observation of Henry J in Barrets & Baird (supra), quoted in the extract above, has been questioned in subsequent cases.  In Inchroy Credit Corporation Ltd v Cheung Man Cheung [1992] 1 HKLR 120, for example, Kaplan J considered Henry J had gone too far.  As Keith J observed in Trend Publishing (supra), at 230D-F, that was because “there may well be cases where justice required the defendant to recover its costs from the plaintiff, even when the plaintiff had discontinued the proceedings for reasons other than the certainty or likelihood of defeat.”

21.  We agree with these reservations.  As Barma J (as he then was) also observed in Re Peaktop (supra), at [7], it is clear from O.21, r.3(1) of the Rules of the High Court that the court has a wide discretion as to what, if any, terms should be imposed when giving leave to withdraw.

22.  It has also been stated by the English courts in the post-CPR era that the starting point that a successful claimant is entitled to his costs should be underlined and that the court must not be too ready to adopt the fall back position of no order as to costs: Harripaul v Lewisham LBC (supra), at [5], per Rimer LJ.

The parties’ positions

23.  The defendants have advanced two alternative “costs proposals”:

(1)  Their “primary costs proposal” is that SVK should pay the defendants’ costs herein (but not including any costs in respect of the vacated hearing) up until the date of the consent order.

(2)  Their “alternative costs proposal” is that there should be no order as to costs.

24.  In support of his primary costs proposal, Mr Barlow relied on the following matters:

(1)  SVK’s conduct: the defendants maintain that, upon the expiry of the lock up undertakings, the entire proceedings below (and hence the appeal) became academic.  Given that SVK took no steps to ensure that the appeal was heard before it became academic, SVK should be held accountable for failing to conduct the appeal promptly so as to keep it viable.

(2)  The defendants’ conduct: on the other hand, the defendants say that they had all along acted consistently with their professional duties and took the necessary steps to vacate the appeal hearing once it became clear that the appeal had become academic.

(3)  The appeal has not been heard, and the defendants say that it would be an “unfair and sterile exercise (plus a “gross misuse of this court’s time”) to permit a [satellite] debate of the now academic merits of the parties’ appeal cases or for this court to give a tentative “half decision” upon any such arguments”.

25.  The defendants also rely on these matters in support of their alternative proposal that there should be no order as to costs.  In addition, the defendants maintain that they had a reasonably arguable case for upholding the judge’s decision, even though the granting of leave to appeal meant that SVK had a reasonably arguable appeal.

26.  On behalf of SVK, Mr Keith Lam invites us to order the defendants to bear SVK’s costs of the appeal, the costs below (in respect of SVK’s summons to set aside leave to serve out and the defendants’ summons for an injunction) and the leave to appeal applications, all on an indemnity basis.  The costs of the Third Party Notice itself are to be dealt with separately pursuant to Master J Wong’s order dated 5 October 2018 granting leave to withdraw the Third Party Notice.

27.  In support of SVK’s position, Mr Keith Lam made the following points:

(1)  SVK contends that the third party proceedings below between the defendants and SVK did not become academic upon the expiry of the lock up undertakings.  Rather, the proceedings below (and thus the appeal) were rendered academic only as a result of the defendants’ application for leave to withdraw the Third Party Notice.

(2)  SVK maintains that the defendants are clearly not the “winning party” in the present case, as the withdrawal of the Third Party Notice (which was at the choice of the defendants) had the same effect as if leave to serve out had been discharged.  Thus, SVK submits that it should be regarded as having obtained substantially the relief it sought and thus as the “winning party”.

(3)  SVK submits that its appeal has strong merits.  It was emphasized that this is not a case which requires much evidence and that there should be little difficulty for the court to form a view as to the merits based on the available materials. 

Discussion

Did the proceedings below and the appeal become academic on expiry of the lock up undertakings?

28.  In its writ filed on 27 May 2016, the plaintiff claimed against the defendants in respect of the alleged breach of the lock up undertakings, and sought, inter alia, an injunction, damages, interests, and costs.

29.  In its Third Party Notice filed on 18 July 2016, the defendants claimed against the lenders and SVK for, inter alia, recission of various agreements between the defendants and the third parties (including the control agreements with SVK) for fraud and/or mistake; an account of the respective shares pledged under the loan agreements and/or their proceeds, and/or equitable compensation for breach of trust, and/or damages for deceit; and/or an indemnity or contribution should the plaintiff succeed in its claim against the defendants in respect of the alleged breach of the lock up undertaking.

30.  The plaintiff’s Statement of Claim filed on 15 March 2018 claimed an injunction to restrain the defendants’ breach of the lock up undertakings; declarations that each of the defendants had breached their respective lock up undertakings; further or other relief; and costs.

31.  The defendants emphasized that the plaintiff did not maintain any claim for damages against them in the Statement of Claim, so that even though the plaintiff has declined to discontinue its action against the defendants, the defendants considered the proceedings below to be spent, and contended that the expiry of the lock up undertakings inevitably rendered the entire proceedings below, including the third party proceedings and hence the appeal, academic.

32.  With respect, we do not agree with Mr Barlow that the expiry of the lock up undertakings would effectively or inevitably render the proceedings below, whether the main or third party proceedings, or the appeal academic.

33.  As Mr Keith Lam rightly pointed out, proceedings are academic if there is no true dispute and the outcome of the proceedings cannot affect the parties in any way: Ainsbury v Millington [1987] 1 WLR 379, 380F-G, 381A-B, per Lord Bridge.

34.  Although the defendants sought to downplay the fact that the plaintiff has declined to discontinue the proceedings below, the fact of the matter is that it remains a live issue between the plaintiff and the defendants whether the defendants acted in breach of the lock up undertakings by pledging the shares as security for the loan facilities from the lenders.

35.  The defendants filed their Defence in the proceedings on 14 June 2018, nearly two months after the expiry of the lock up undertakings.  However, the Defence contained no suggestion that the expiry of the lock up undertakings had rendered the entire proceedings academic.  Their pleaded case was effectively a bare denial that the relevant loan agreements and the transfer of the shares pursuant thereto constituted breaches of the lock up undertakings.  It is not clear from the materials before us what defence the defendants might rely on, other than the allegation in the Third Party Notice that the relevant agreements between the defendants and the third parties (including the control agreements with SVK) were void for fraud and/or mistake and ought to be rescinded.

36.  In those circumstances, it appears to us that at least the issue of rescission would remain a live issue between the defendants and the lenders and SVK, notwithstanding the expiry of the lock up undertakings, at least until the defendants chose to withdraw the third party proceedings altogether.

37.  We are, therefore, not persuaded by Mr Barlow that the expiry of the lock up undertakings inevitably rendered the proceedings below and the appeal academic.  On the contrary, we agree with Mr Keith Lam that the appeal was only rendered academic because of the defendants’ application to withdraw the Third Party Notice in the proceedings below (apparently notwithstanding that the main proceedings between the plaintiffs and the defendants remained in existence).

38.  Thus, in our view, the event that rendered the appeal academic was the defendants’ decision to seek leave to withdraw the third party proceedings.  This was their decision, which cannot be laid at the door of SVK.  It provides no basis for the suggestion that costs should not, as it were, follow the event in the normal way.  Still less does it justify any suggestion that costs should be paid by SVK to the defendants.

The parties’ conduct

39.  In any event, we are not persuaded that SVK should be blamed for failing to conduct the appeal “in a manner that might have kept it viable”.

40.  An important premise for the defendants’ contention that the proceedings below became academic upon the expiry of the lock up undertaking (with which we do not agree, as explained above) is the fact that the plaintiff did not seek damages against the defendants in its Statement of Claim.  But the Statement of Claim was not filed until 15 March 2018, by which time SVK had already obtained leave to appeal from this court (in January 2018) and filed its Notice of Appeal (on 9 February 2018).  There is no reason to find fault with SVK’s conduct in respect of the leave application or the appeal prior to 15 March 2018. Further, as the plaintiff had not withdrawn its proceedings against the defendants, and the defendants did not withdraw their third party proceedings against (among others) SVK until 5 October 2018, it is difficult to see why SVK should be criticized for not moving more swiftly to bring the appeal to a hearing.  As it was, the appeal was due to be heard some 9 months after the Notice of Appeal was lodged, which cannot be said to be dilatory.

41.  More pertinently, as already noted, the defendants filed their Defence in the main proceedings on 14 June 2018, after the expiry of the lock up undertakings, but made no suggestion that the proceedings below had been rendered academic.  Nor did the defendants take any step to bring the proceedings below to an end on such a basis.  Further, they did not take steps to bring the third party proceedings to an end until much later – it was not until 19 September 2018, about one month before the appeal was to be heard, that the defendants applied to vacate the hearing.  Even then, they did not apply to withdraw the Third Party Notice against SVK until five days later, on 24 September 2018, resulting in the consent order being made on 5 October 2018.

42.  In the circumstances, insofar as the conduct of the parties is concerned, we consider it to weigh against rather than in favour of the defendants.

The defendants not the “winning party” - no reason to depart from the general rule

43.  It follows from the foregoing that the defendants cannot be viewed as the “winning party” in this case.  On the contrary, they having decided to withdraw the third party proceedings, and to vacate the hearing of the appeal, they are to be regarded as the conceding party.  Having regard to all the circumstances, and the parties’ conduct discussed above, we see no reason to depart from the general rule that the party applying to discontinue/withdraw (i.e. the defendants here) should bear the costs.  That said, we do not agree with Mr Keith Lam that such costs should be taxed on the indemnity basis.

The merits of the appeal

44.  In the circumstances, it is not necessary for us to consider the merits of SVK’s appeal.  That being said, looked at on a broad brush basis, it seems to us that the appeal had real merit, for the reasons adumbrated by Mr Keith Lam in his submissions, both in relation to the ground based on the separability of the choice of jurisdiction clause and on the ground that no serious issue to be tried had been shown under the third party proceedings, and that it was not open to the defendants to rely on a ground not taken at the ex parte stage to justify the granting of leave which had not been granted on that basis.

Conclusion

45.  For the reasons set out above, we order that the defendants should bear SVK’s costs of the appeal (including those in connection with this decision), the costs below (of SVK’s summons to set aside leave to serve out and the defendants’ injunction summons, but not including the costs of the Third Party Notice itself, which will be dealt with separately by the court below), and the applications for leave to appeal both before this court and the judge, such costs to be taxed on the party and party basis if not agreed.